Economics of leadership and hierarchy

8 years 1 months ago

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This paper explores leadership within hierarchical organizations. For each hierarchy, I consider a dynamic signaling game in which each player observes only the actions of his direct superiors before choosing his action. At the top of the hierarchy are the leaders, who learn the state from nature. The hierarchy controls the ﬂow of information and the timing of the game, and determines the equilibrium output and welfare. I show that the welfareoptimal hierarchy is the chain, because it maximizes the incentive of players to “lead by example” for their subordinates. The chain remains optimal even in the presence of veriﬁable or unveriﬁable costly information acquisition by the leaders. Lastly, I characterize optimal hierarchies when the number of layers or the number of leaders is limited. Applications to fund-raising are also discussed.

Junjie Zhou

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